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While the network neutrality debate has focused primarily on whether ISPs should be able to charge companies like Netflix for faster access to consumers, cable companies are now arguing that it's really Netflix who holds the market power to charge them.

This argument popped up in comments submitted to the FCC by Time Warner Cable and industry groups that represent cable companies. (National Journal writer Brendan Sasso pointed this out.)

Even if broadband providers had an incentive to degrade their customers’ online experience in some circumstances, they have no practical ability to act on such an incentive. Today’s Internet ecosystem is dominated by a number of “hyper-giants” with growing power over key aspects of the Internet experience—including Google in search, Netflix and Google (YouTube) in online video, Amazon and eBay in e-commerce, and Facebook in social media.

If a broadband provider were to approach one of these hyper-giants and threaten to block or degrade access to its site if it refused to pay a significant fee, such a strategy almost certainly would be self-defeating, in light of the immediately hostile reaction of consumers to such conduct. Indeed, it is more likely that these large edge providers would seek to extract payment from ISPs for delivery of video over last-mile networks.

ISPs making payments to online video companies would be similar to the payments cable TV providers make to programmers. But in practice it hasn't worked that way. Cable TV and Internet providers have less incentive to ensure that Netflix and YouTube work well on their networks because online video competes against their own video services and because the cable companies face little competition in each local market.

All talk of "fast lanes" has centered on ISPs potentially charging Web services for better access to consumers over the last mile of the network. The FCC's latest proposal would let ISPs charge for fast lanes as long as they provide a minimum level of service to all Internet users and Web services. Network neutrality proponents have urged the FCC to pass stronger rules that would ban such prioritization. Yet the issue is even more complicated than that because ISPs could still degrade bandwidth-heavy services like video by refusing to upgrade infrastructure that connects their networks to the rest of the Internet.

Netflix CEO: “We don’t charge them, they don’t charge us”

Nonetheless, Netflix CEO Reed Hastings noted in an earnings call this week that "the question comes up—should we over time be charging ISPs for the privilege of carrying our data to their customers, and charging for that?"

The answer, so far, is no. "I think the Internet really has this different, much more open architecture than classic cable, where we meet in the middle, we bring the bits to where they want, we don't charge them, they don't charge us," Hastings said. "Both sides innovate,. It's very open structure, and I think then you get more competitors for Netflix frankly, but what you get is this open vibrant system that the Internet has been so famous for, and that's really the tradition that we grew up in, and that we're trying to see carry forward, and I'm optimistic about it, frankly."

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In fact, Netflix has paid Comcast and Verizon for direct connections to their networks to improve quality, although not for a faster pipe over the last portions of the network that bring video directly to consumers.

"To TWC’s knowledge, no broadband provider has expressed any intention of prioritizing one class of Internet traffic at the expense of another," the company wrote. "If anything, it is more likely that some content owners might well seek payment from broadband Internet access providers as a condition of delivering their content—paralleling the business model that already exists on MVPD [multichannel video programming distributor] platforms. The Commission should not turn a blind eye to actual marketplace dynamics in developing open Internet protections."

Verizon also complained about the power wielded by Google, Netflix, and Amazon, saying that the companies "have undeniable power to affect the consumer experience online and Internet openness, and the reach of these companies often dwarfs that of particular ISPs." For example, "Netflix has built its 'Open Connect' content delivery network to support its video service, and until recently it denied the highest quality video to end users whose broadband providers did not agree to host Netflix’s servers directly on their networks."

The ability of ISPs to offer special, paid arrangements to Web services "could prove crucial to help smaller companies" competing against Google, Amazon, and Netflix, which are big enough to build their own content delivery networks, Verizon wrote. Verizon asserts that it doesn't plan to offer paid prioritization but does want the ability to negotiate "individualized agreements beyond paid prioritization, such as sponsored data, two-sided pricing, or other benign arrangements."

The American Cable Association (ACA), which represents smaller cable companies (and opposes the AT&T/DirecTV and Comcast/TWC mergers) argued that the FCC's rules should apply to Web services as well. "If protecting and preserving Internet openness are the goals, the proposed rules are too narrow because they do not address the threats posed by Internet edge providers," the ACA wrote.

The concerns aren't hypothetical, the ACA said.

"For example, Internet edge providers who are also distributors of MVPD programming, have opted to selectively block access to otherwise freely accessible Internet content to all broadband Internet subscribers of an MVPDs to extract higher fees for its MVPD programming from the MVPD," the ACA wrote. "In 2009, Viacom threatened to block access to Time Warner Cable broadband subscribers from accessing its web-based content, including such popular sites as MTV.com and Nick.com. In 2010, News Corp. threatened to block access to Cablevision Internet users from accessing Fox websites, including Hulu.com, which News Corp. partially owned, as part of Fox’s on-going retransmission dispute with Cablevision… Similarly, in 2013, CBS elected to block Time Warner Cable and Bright House Network broadband subscribers in New York as part of their dispute over retransmission rights."

Although big and small cable providers have different concerns on many issues, the ACA and NCTA ultimately make roughly the same argument on net neutrality. Each said the FCC should continue a "light touch regulatory approach" and that broadband providers should not be reclassified as common carriers, a move that would open them up to stricter, utility-style regulation.